Why profitable companies still run out of cash: the cash conversion cycle

What the cycle measures

The cash conversion cycle (CCC) is the number of days between paying for inputs and collecting cash from the customers who bought the finished goods. Keurig Dr Pepper's 2024 annual report to the SEC defines it as days inventory outstanding (DIO) plus days sales outstanding (DSO), minus days payables outstanding (DPO).

Definitions differ in detail. In the same filing, Keurig Dr Pepper measures DIO against cost of sales and DSO against net sales. It measures DPO against cost of sales plus selling, general and administrative expenses.

A worked example with round numbers

The figures below are illustrative, not drawn from any real company. Take a distributor with annual sales of $3,650,000, or $10,000 a day, and cost of goods sold of $2,190,000, or $6,000 a day.

It holds $360,000 of stock on average. That is 60 days of cost of goods (360,000 ÷ 6,000), so DIO is 60.

It has $450,000 of unpaid customer invoices. That is 45 days of sales (450,000 ÷ 10,000), so DSO is 45.

It owes suppliers $180,000. That is 30 days of cost of goods (180,000 ÷ 6,000), so DPO is 30.

The cycle is 60 + 45 − 30 = 75 days. In dollars, the business has $360,000 in stock and $450,000 in receivables, less $180,000 of supplier credit. That is $630,000 of its own money tied up in operations, whatever the profit and loss statement says.

Now suppose sales and costs rise 20% with the same days, so working capital rises by the same 20%. Working capital rises to about $756,000, so the business needs roughly $126,000 more cash before the extra sales have paid for themselves. The faster the growth, the larger the funding need. This is why a fast-growing, profitable company can run short.

How much cash a small business actually holds

JPMorgan Chase Institute measures this in cash buffer days: the number of days of typical outflows a business could pay from its balance if inflows stopped.

Its 2016 report, based on 597,000 small businesses with Chase business accounts and transactions from February to October 2015, put the median at 27 days. The 25th percentile was 13 days and the 75th was 62.

Industry mattered. Restaurants had a median of 16 days and real estate 47. Labour-intensive industries held 23 days against 38 for capital-intensive ones.

A later Institute page, dated April 2020, gives a lower picture: 50% of small businesses had fewer than 15 buffer days, and only 40% held more than three weeks. The two reports use different samples, and the 2020 page does not state the years its data covers.

Why a few days of supplier terms can move the whole cycle

Keurig Dr Pepper's filing shows how sensitive the number is. Its cycle was 12 days at the end of 2024, against minus 8 a year earlier. A negative cycle means suppliers are funding more than the company's stock and receivables combined.

DIO fell from 71 to 68 days and DSO rose from 34 to 36. The swing came mainly from DPO, which fell from 113 to 92 days. The company attributes this to the reduction of payment terms for certain suppliers.

The filing says payment terms for suppliers, excluding those that require cash at purchase or sale, generally range from 10 to 360 days. It also describes a programme in which suppliers can choose to sell Keurig Dr Pepper's payment obligations to financial institutions. The company says it has no economic interest in a supplier's decision to enter into those agreements.

Its risk factors say reductions in payment terms have negatively affected, and could continue to negatively affect, its liquidity. It also cites its need to use various financing arrangements for short-term liquidity.

A fast-growing, profitable company can run short of cash because every extra sale must be funded before it pays back.

The levers, and what each one frees

Each lever is one of the three days numbers, and each can be priced in cash using the example above.

Collect sooner. Cutting DSO from 45 to 35 days brings receivables down from $450,000 to $350,000 and releases $100,000.

Hold less stock. Cutting DIO from 60 to 50 days reduces stock from $360,000 to $300,000 and releases $60,000.

Pay later, within terms. Raising DPO from 30 to 40 days lifts supplier credit from $180,000 to $240,000 and releases another $60,000. Keurig Dr Pepper's filing reports that cutting payment terms hurt its liquidity.

All three together take the example from 75 days to 45 and free $220,000, raising cash with no new sale.

What to track

Because the cycle is built from balance-sheet figures, it can be calculated monthly from accounts that already exist.

Cycle length also combines with growth. A business should compare the cash a planned increase in sales will absorb, using its current days, with the cash it holds. The difference is the funding it must arrange before the sales arrive.